Equity release adviser Key Advice said families facing potential IHT bills due to the change in the law from April 2027 may be confused about the most efficient way to gift their wealth. Alternatively, the broker said they risk gifting too much of their pension pot to mitigate a potential tax bill and ending up putting their own financial security at risk.
Currently, unused pension wealth is exempt from IHT. This leaves families the option to leave behind any retirement savings or assets stored within a pension wrapper to loved ones without the risk of breaching the IHT threshold of £325,000, as it falls outside the estate for the purposes of the IHT calculation.
A 40% tax is levied on the value of the estate above the threshold. An additional allowance known as the residence nil-rate band – worth £175,000 – increases the threshold to £500,000 if you pass your main home to a direct descendent.
The government estimates the inclusion of unused pensions in IHT from 6 April 2027 will generate an additional £3.44bn in IHT receipts in the first three tax years it operates.
Key Advice warned that the figure will be higher if parents and grandparents make mistakes with gifting.
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It is urging parents and grandparents to seek independent advice as part of their retirement and estate planning strategies.
Key Advice said housing wealth can be used to support capital and/or income needs in later life and for intergenerational wealth transfer through gifting. Gifting from property wealth may reduce IHT liabilities if the donor survives seven years. Modern equity release products could offer a more flexible or tax-efficient way to support family compared to other strategies.
Will Hale (pictured), chief executive of Key Advice and Air, said: “The inclusion of unused pension assets in IHT calculations is expected to generate substantial extra revenue for the government as more estates become liable.
“It underlines the importance of advice for parents and grandparents on how to fund and structure gifts to family while maintaining their own standard of living and being tax efficient.
“The new rules further reinforce the need for property wealth to be included as part of retirement income and estate planning. Later life lending products can help fund retirement and also be used as an IHT mitigation tool.”
